Today itās time to talk about something important: How do we actually research a stock? Itās increasingly obvious that most beginners buying stocks donāt know the work required, so today weāre going to take a look at how to do just that. IMPORTANT: This is labelled as Part 1 because there is a lot I will not be covering and only introducing the basics, so if people like this kind of post I will do more. REMEMBER: There is A LOT of risk that comes with buying single stocks, this is not a recommendation to start buying, but rather education to help those understand who already own businesses. So whatās a stock? A stock is simply a representation of a company on a public exchange that can be traded in order to invest in the business. A stock is NOT just numbers on a screen, itās an investment directly towards an underlying business. You are buying the company in hopes it will bring a return on your investment in the future. First you must find a company youāre interested in. Letās take a look at Walmart ($WMT) as an example. Retail is pretty straight forward to understand and a good sector to help you practice your research. So whatās the first thing we should do after we find a company weāre interested? Understand the business. Since we picked Walmart, you must understand how a retail store works. This is why itās important to start with something thatās easier to understand. Not all sectors are created equal. Generally speaking retail stores follow these principles: - Buy products from wholesale or providers - Sell products for profit - Create a competitive advantage over other competitors - Grow the size of the stores to sell more products - Create more stores - Get more customers through marketing, advertising gimics, etc. Now every company is different, and itās important to understand that for every single business you research. Even in the same sector, what one company does wonāt necessarily be the same as another. In this case, Iāve displayed some general principles to understand a retail store. Once you have a general idea of the business whatās next? Go to the website. How can you claim to understand a business if youāve never even visited their company site? You should be visiting a section of the site called āInvestor Relationsā. This is where a business will post all information relevant to investor. Just type into Google ā(Company) Investor Relationsā and you can likely find the right page. Most businesses will have a tab on their site to find this, but in this case Walmart has a separate site so googling it will help. If you take a look through the investor relations page, youāll see a lot of information. Our first main focus is going to be on the financial documents of a company. Every business will have the investor page laid out differently, Walmarts is very easy to navigate. Of the different tabs select āFinancial Infoā. Thereās multiple different sections here and they actually lay out some things for us, but for now weāre focusing on āFinancial Resultsā. This is where a company will post all of its quarterly and yearly earnings, along with required forms and often times management calls. In the picture below, youāll see the section for 2024. The earnings release, presentation and 10-K are all related and where youāll find the financial information. Side Note: a 10-K form is a REQUIRED by law form that all businesses must file yearly with the SEC to show the full length of their financial status. This includes all documents and information. The 10-Q is the same thing, but for quarterly reports. The 10-K shows all financial information, the earnings release is a more a condensed and visually appealing version of this, and the presentation is what the company creates to better expand on their numbers and talk more deeply about what they mean. The presentation is the easiest to understand as it provides the most context. Now looking at the presentation, thereās a LOT of information, and you might be saying āThis is too much do I have understand all thisā, well the answer is largely yes. This is why investing in businesses takes so much work, you must regularly keep up with the business and know how to read a full presentation and financial documents in length. Letās focus on just a few aspects for now: - Revenues/Expenses - Profit/Earnings - Future Guidance - Free Cash Flow All of this information are found under the 3 main financial documents in a 10-K or 10-Q: The Balance Sheet, The Income Statement, and The Cash Flow Statement. Youāll see that companies post about their EPS, or Earnings Per Share, and this represents how much profit a company makes PER share of stock. This is used as a measure for analysts and why a company will miss or beat an earnings, itās based on EPS. The earnings a company makes however are based on the revenue it generates minus the expenses (over simplification to help you understand). Revenue - Expenses = Profit The main goal of a company should always be to increase its revenue and decrease the expenses. A good business will be growing NET income over time consistently. If your business is growing revenue 10% year over year, but expenses are growing 11% year over year, it means the business is actually slowly making less profit, this is usually not a good sign. Free Cash Flow is also another crucial aspect to a good business: the more cash a company can generate and have on hand is usually better. Free cash flow is often used because it takes into account non-cash items whereas EPS usually doesnāt. FCF is how much cash a company can regularly generate on a yearly basis. The cash a business creates is what it should be using to cover obligations. Whether itās Debt, Loans, Interest, Dividends or Share Buybacks, a good business can cover these obligations with the cash it creates. If a company increases its cash flow yearly while still paying for all of its obligations, itās likely a good sign of financial health. If on the other hand a business makes a high net income, but the FCF is decreasing, it means it has more payments to make then cash on hand. Itās even worse if youāre using debt to pay obligations instead of cash, at some point the loans will catch up and it cannot operate forever. The company also usually posts āGuidanceā of their financial situation. Usually you can find a section on this, and underneath will be what the company expects to do in the future. It may specific activities, or it might be how much income and cash flow they intend to generate the next fiscal year. This is usually expressed as a percentage year over year to show you at what rate the company is growing. Remember to keep track of this and look back at previous guidance to see if they actually met expectations. This was just a glimpse into how to research your stocks (companies). Itās a very basic introduction and thereās so much more to cover. If this is a post you like I will do more like this, but remember again thereās a lot of risk involved in buying stocks, itās not quite as simple as you think. It can however become less scary the more you know. The less you understand, the more risk you take on. Thereās so much more to research than this, so make sure you donāt take this at face value and understand that investing requires a lot of critical thinking. If thereās anything youāre struggling with feel free to comment, and as always do your research and happy investing! Part 2: https://share.blossomsocial.com/gqP42aCnmEDaWEB1A Subscribe to the newsletter: relatablefinance.substack.com
